By Tiernan Ray

Shares of networking equipment provider Juniper Networks (JNPR) today closed up $1.71, or almost 7%, at $27.72, following a report yesterday afternoon of better-than-expected Q4 results, and a forecast for this quarter in line with analysts’ expectations.

CEO Shaygan Kheradpir, who came on board three weeks ago, told analysts that the company is preparing an answer to the complaints of activist fund Elliott Management, which a week and a half ago announced it had bought 6.2% of Juniper stock and would push for cost cuts and shareholder payouts.

The company’s answer to Elliott’s concerns, described on the conference call last night, is dubbed the “integrated operating plan,” or IOP, for short.

Kheradpir laid out for analysts the three foci of that plan:

My team and I are already hard at work developing an integrated operating plan that addresses three key priorities. Firstly, we are tailoring our strategy to focus on innovation that matters to our customers and where we excel, bringing in the outside in customer imperatives. I intend to restore Juniper’s focus on thoughtful, highly value-accretive innovation, and rebuild the get-it-done culture that unleashes the talent of our people. Additionally, we will implement a more efficient cost structure, commensurate with our strategic focus and the competitive environment, resulting in reduced costs. I will be taking a three-pronged approach: focused R&D that matters, radical simplification on automation, and right-sizing. We will do this in a smart way with an eye towards returns on investment and focusing on the cost drivers, such as operational leading indicators. This is something I’ve done before, and I’m confident can be effectively implemented at Juniper. Lastly, we’ve been taking an in-depth look at our future cash flows and capital structure to assess how we can best return capital to shareholders while still maintaining the financial flexibility to invest for future growth. We are actively evaluating the capital return policy, which includes level of share repurchases and dividends.

The Street today seemed absolutely charmed by IOP, and there were at least three upgrades to the stock by analysts who expect good things will come from the initiative.

Barclays‘s Ben Reitzes, raising his rating on the shares to Overweight from Equal Weight, and raising his price target to $34 from $29, writing that despite a 15% rise in the shares this month, “it is still “early” in the turnaround process” and that “the new CEO, Shaygan Kheradpir, understands the urgency – and his need to act in real time to satisfy shareholders.”

Reitzes writes that “fundamentals are improving for Juniper as customers are embracing new products after a long evaluation period,” and that “the company may benefit from product transitions at Cisco for several quarters.”

he raises his estimates for this year to $4.9 billion in revenue and $1.47 in net profit per share, up from $4.8 billion and $1.32.

Reitzes is supportive of Elliott’s call for change, and he thinks there are some basic things Kheradpir can do to fix the company:

We have voiced support for recent shareholder activism (for details please see our Jan 13 report, Juniper Networks: A Strategy Shift Would Make a Lot of Sense) and pointed out several operational and strategic issues we see with Juniper’s business model, from an underutilized balance sheet to highly inflated opex vs. peers. Some key shareholders have also pointed out how the portfolio should be simplified. We believe there are several relatively straightforward steps that could be taken to right-size the cost structure – portfolio rationalization, R&D headcount reductions, R&D salary cuts – and increasing capital return in the form of accelerated share buy-backs and instituting a dividend. If all were implemented, our scenario analysis suggests Juniper’s earnings power would be even higher than our raised estimates – and much higher than consensus.

Ader cites “momentum” for the company’s routing products, and a “reacceleration” in switching hardware. But he’s more focused on the cost-cutting prospects and potential increase in shareholder payouts:

We expect the IOP to implement major changes to Juniper’s capital structure that will include the return of cash to shareholders through accelerated share buybacks and dividend payments. We expect the outcome to be a meaningful rise in non-GAAP EPS in fiscal years 2014 and 2015 relative to previous consensus estimates. We have taken a first stab at estimating earnings under the IOP and arrived at non-GAAP EPS estimates of $1.48 (up from $1.38) for fiscal year 2014 and $1.78 for fiscal year 2015. Our EPS estimates assume that management will expand operating margins from 2013 to 2015 by roughly 300 basis points through prudent cost management and reduce share count by roughly 30 million shares by 2015 through increased buybacks. Our EPS estimates also assume that Juniper will be able to grow sales by 6% to 7% over the next two years, in line with sales growth in 2013. While we recognize that companies cannot cut their way to prosperity, we believe that Juniper has been badly mismanaged in recent years, which leaves ample room for both rationalizing the cost structure and improving operational execution, without major impacts on revenue.

Ader raised his estimate for 2014 to $4.97 billion in revenue and $1.48 in EPS from a prior $4.83 billion and $1.38.

Goldman Sachs‘s Simona Jankowski raised her rating to Neutral from Sell, and raised her price target to $25 from $17, for two reasons: one, the company’s “top-line trends are improving, with 4Q sales 3% ahead of our estimate on much stronger switching and security revenues,” and, two, “new CEO Shaygan Kheradpir will introduce an ‘Integrated Operating Plan’ that will include an improved cost structure and capital allocation strategy – two key drivers we previously cited would make us more positive on the stock.”

Like Reitzes and Ader, Jankowski believes the company is finally seeing a positive reception for its product portfolio:

Juniper’s 4Q results pointed to an improving sales trajectory in all key segments, includingrouting, switching, and security. We attribute the positive inflection primarily to stronger enterprise demand in 4Q, which benefited both the switching and security segments. This is consistent with the strong 4Q enterprise results already reported by a number of other companies in the broader ecosystem, including F5 [Networks (FFIV)], Riverbed [Technology (RVBD)], and VMware (VMW). Indeed, Juniper’s enterprise sales (35% of total company sales) were up 12% qoq (vs. the 3-year average of 3%) and 11% yoy, the strongest yoy performance in nine quarters. Its service provider sales (65% of total company sales) were up 5% qoq (vs. the 3-year average of 9%) and 12% yoy. In addition, as we discuss in more detail below, we believe Juniper benefited from improved product positioning following recent updates to its portfolio.

Jankowski does some back-of-the-envelope work on what could be accomplished in cutting costs:

We estimate the EPS accretion if Juniper decreases opex as a percentage of sales. Our current estimate assumes Juniper’s CY14 opex as a percentage of sales will be 43.1% and this results in our estimated $1.54 in non-GAAP EPS. Note that this compares to our prior estimate of 44.9% and $1.25, as we have reflected higher CY14E revenue growth (7% vs. 2% previously, as discussed above) and some cost cuts, as indicated by management. We estimate that if Juniper lowers opex as a percentage of sales further to 41.6% then it will increase CY14 EPS by 8% to $1.66. If Juniper matches the comp group’s median of 40% of sales to opex, then we estimate it will increase CY14 EPS by 15% to $1.78. Note that this analysis does not account for the potential revenue impact from exiting certain product lines or cutting sales headcount, which could counter some of the EPS upside from the opex cuts alone.

Jankowski raised her 2014 estimates to $5 billion in revenue and $1.54 in EPS from a prior $4.73 billion and $1.25.

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JANUARY 24, 2014 7:27 P.M.

Anonymous wrote:

aint gonna happen. this is the same speech given about 4 years ago with the "revolutionary" Qfabric and its ability to radically alter the world of networking.
didn;'t happen then because they did it all in a vacuum of an "operating plan" and never took into account the coming trends towards SDN and the need to play nicely with the competition. Their revolutionary fabric only worked with other JNPR boxes. As if everyone would rip out their entire infrastructure for this thing. It was flawed and late.
All the new guy adds is a fancy phrasing around what will actually happen: downsizing.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.